Institutional background of China's ''Silicon Valley''

2.1 Description of the Z-Park

The Zhongguancun Science Park was established in Beijing in the late 1980s as the first national-level high technology district and has been the largest science park in China since its establishment. The total revenue of firms in the Z-Park was about yuan600 billion, or approximately US$80 billion, in 2006, contributing one seventh of the total revenue of all science parks in China and 5% of the total revenue of the industrial sector in China (Zhongguancun Science Park 2009).

The Chinese government has supported the Z-Park with the view that development of the ZPark can be the engine of domestic innovation and the model for China's high-tech industries. To attract entry of domestic and foreign firms, the government offers several preferential benefits to firms located in the Z-Park. The most notable of these are tax incentives. For all eligible firms, the corporate income tax rate is 15%, less than half of the normal corporate income tax rate of 33%. New entrants additionally enjoy a tax waiver for the first three years of operation. In 1999, additional preferential policies were granted by the government, such as enlarging the scope of the tax waivers and deductions (e.g., reduction of sales taxes on technological transfers, consulting, and services and R&D expenditures). In order to attract strong inflows of brainpower from other parts of China as well as from overseas, the government allows PRC citizens in high-tech firms in the Z-Park to obtain Beijing residence.⁴

The rapid development of the Z-Park benefited enormously from the high density of nationally renowned universities and research institutions in the park. The park hosts 73 universities, including the leading universities in the nation, Peking University and Tsinghua University and 232 research institutions, including the Chinese Academy of Science. These universities and institutions provide an ample supply of educated labor to both domestic firms and MNEs in the Z-Park, and hence a significant portion of workers, including chief executive officers, in the Z-Park are alumni of the universities located in the park.

2.2 Channels of knowledge spillovers from FDI

MNEs have been a critical part of the high growth of the Z-Park. Our data show that the MNE share of total sales and capital stocks are about 17% in 2003. Many multinational giants are residents of the Z-Park, and more importantly, the Z-Park has become a cluster of MNE R&D centers. By the end of 2005, 43 well-known global MNEs, including IBM, Microsoft, Bell Labs, Fujitsu, Intel, Motorola, Panasonic, and Oracle, had located their PRC R&D centers in the Z-Park. MNEs also employ large numbers of educated workers: more than 10,000 workers with at least undergraduate-level education and more than 1,200 workers with graduate-level education in 2003. In general, those MNEs are technologically more advanced than domestic firms. Using the same data set as in this paper, Todo, Zhang, and Zhou (2006) found that the total factor productivity (TFP) of MNEs is about 40% higher than the TFP of domestic firms on average.5 Ge and Chen (2008) also found that a larger percentage of foreign ownership is associated with higher productivity, based on a study of all large- and medium-sized joint ventures in the PRC manufacturing sector.

There are a number of reasons to expect knowledge spillovers from such technologically advanced MNEs to domestic firms in the same industry, particularly through MNE employment of an educated labor force. The authors of this paper conducted interviews with managers of several foreign and domestic firms in the Z-Park and discern several important channels of FDI spillovers.6 Most notably, local engineers and managers who work in MNEs often leave the job after several years—three years on average according to one manager of an MNE—of working and learning of foreign advanced knowledge. After that period, some of them are employed by domestic firms, and some set up their own firms. Such labor turnover between firms is an important channel for knowledge spillovers from FDI. Other possible channels of spillovers include technological cooperation between MNEs and domestic firms and technological outsourcing from MNEs to local firms. All of these channels should involve educated workers in MNEs.

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